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Can Wall Street Handle Alphabet’s Moonshot Spending?

Alphabet CFO Ruth PoratAlphabet CFO Ruth Porat
Alphabet CFO Ruth PoratPhotograph by Jin Lee — Bloomberg/Getty Images

Public company earnings calls have a language of their own. Companies create their own metrics and their own accounting systems. Analysts and journalists have to learn countless silly names for various products and offerings. Executives answer questions in long, indirect, jargon-laced circles, talking around the answer without actually delivering said answer. Analysts ask questions in the same language, knowing they won’t be answered, but playing along with the charade all the same.

Alphabet (GOOG) and its predecessor, Google, have been a talking the language of earnings reports for 46 quarters now. But its 2015 year-end report marked an important turning point. For the first time, it broke out its “other bets” segment, a term that describes the company’s wild, expensive “moonshots” like medical technology, self-driving cars, and Internet balloons from its core search business.

That means the world finally saw exactly how much money Alphabet spends on money-losing moonshots. The answer was “a lot.” Those other bets lost $3.6 billion in 2015, nearly double that of the prior year. The losses didn’t hurt Alphabet’s standing with investors because the “Google” part of the company–its advertising business—continues to deliver solid growth and profits.

But just in case, Roth Porat, Alphabet’s Wall Street-savvy CFO, took extra pains to repeatedly explain Alphabet’s spending strategy. I imagine this will be a theme going forward.

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The other bets, she said, “will have idiosyncrasies.” Their results may be uneven. “It could be lumpy on a quarterly basis,” she said. They shouldn’t be compared on a quarterly basis, but on an annual basis. Later on the call, she softened that, too. These are long-term bets, she emphasized.

“It is about getting more ambitious things done,” Porat said. The word “frontier” was repeatedly tossed around. Also, “early days.”

Her job isn’t easy. She has to explain the inspiring, weird, and potentially world-changing innovations happening inside Alphabet to a bunch of accounting nerds who whose chief concern is predicting a company’s future profits and losses within pennies per share.

But Porat shined on the innovation talk, more so than in past quarters, and repeatedly warned investors not to obsess over the moonshot losses. Porat, who joined Google in March, was key to the company’ restructuring last summer. The result of the switch to Alphabet is more transparency, both internally and externally.

But that transparency exists only to a point. We don’t know which moonshots are losing the most money, and which ones are close to becoming profitable. We don’t know if the recent round of privacy scares hurt Nest, or if Google’s health arm, Verily, is actually a sustainable business.

Porat and Alphabet are correct to keep most of the company’s spending details a secret–Wall Street is not known for rewarding a companies that make long term investments with no foreseeable payoff.

Alphabet will have no problem spending freely on moonshots as long as Google’s advertising business continues to print money. Even with major challenges from competitor Facebook (FB), especially in video and mobile advertising, Google continues to deliver strong growth and strong profits. Investors traded the stock up nearly 5% after hours, vaulting it ahead of Apple as the most valuable U.S. company.